Paradise Wire & Cable Defined Benefit Pension Plan v. Weil

• Decision Date: 11 March 2019
• Docket Number: No. 18-1483,18-1483
• Citation: 918 F.3d 312
• Court: U.S. Court of Appeals — Fourth Circuit
• Parties: PARADISE WIRE & CABLE DEFINED BENEFIT PENSION PLAN; Hollingsworth, Mendenhall and McFadden, LLC; IG Holdings, Incorporated ; IG Revocable Trust; Dr. Stuart Wollman; Sheila Rosenberg; Rene Demeule, Individually on Behalf of Themselves and All Others Similarly Situated, Plaintiffs-Appellants, v. Edward M. WEIL, Jr.; American Realty Capital Retail Advisor, LLC ; David Gong; Lisa D. Kabinick; Stanley Perla; Nicholas Radesca; Leslie D. Michelson; Edward G. Rendell; American Realty Capital—Retail Centers of America, Inc orporated; AR Global Investments LLC; American Finance Trust, Incorporated, Defendants-Appellees.

918 F.3d 312

PARADISE WIRE & CABLE DEFINED BENEFIT PENSION PLAN; Hollingsworth, Mendenhall and McFadden, LLC; IG Holdings, Incorporated ; IG Revocable Trust; Dr. Stuart Wollman; Sheila Rosenberg; Rene Demeule, Individually on Behalf of Themselves and All Others Similarly Situated, Plaintiffs-Appellants,

v.Edward M. WEIL, Jr.; American Realty Capital Retail Advisor, LLC ; David Gong; Lisa D. Kabinick; Stanley Perla; Nicholas Radesca; Leslie D. Michelson; Edward G. Rendell; American Realty Capital—Retail Centers of America, Inc orporated; AR Global Investments LLC; American Finance Trust, Incorporated, Defendants-Appellees.

No. 18-1483

United States Court of Appeals, Fourth Circuit.

Argued: December 11, 2018

Decided: March 11, 2019

ARGUED: Jeffrey Simon Abraham, ABRAHAM, FRUCHTER & TWERSKY, LLP, New York, New York, for Appellants. George Stewart Webb, Jr., VENABLE LLP, Baltimore, Maryland, for Appellees. ON BRIEF: John B. Isbister, TYDINGS & ROSENBERG, LLP, Baltimore, Maryland, for Appellants. John T. Prisbe, Michael J. Wilson, VENABLE LLP, Baltimore, Maryland, for Appellees American Finance Trust, Inc. and American Realty Capital—Retail Centers of America, Incorporated. Reid M. Figel, David L. Schwarz, Daniel V. Dorris, KELLOGG HANSEN TODD FIGEL & FREDERICK PLLC, Washington, D.C., for Appellees American Realty Capital Retail Advisor, LLC, AR Global Investments LLC, Nicholas Radesca and Edward M. Weil, Jr. Jay A. Dubow, Matthew D. Foster, Christopher B. Chuff, PEPPER HAMILTON LLP, Philadelphia, Pennsylvania, for Appellees David Gong, Lisa Kabinick, and Stanley Perla. Eric N. Whitney, Jeffrey A. Fuisz, ARNOLD & PORTER KAYE SCHOLER LLP, New York, New York, for Appellees Leslie D. Michelson and Edward G. Rendall.

Before NIEMEYER, DUNCAN, and QUATTLEBAUM, Circuit Judges.

Affirmed by published opinion. Judge Quattlebaum wrote the opinion, in which Judge Niemeyer and Judge Duncan joined.

QUATTLEBAUM, Circuit Judge:

This case arises from the merger of American Realty Capital - Retail Centers of America, Inc. ("RCA") and American Finance Trust, Inc. ("AFIN"). After the merger, the shareholders of RCA discovered information about AFIN's financial condition that indicated AFIN was worth less and was less healthy than represented in the proxy statement that induced their vote for the merger. Believing they had been misled, the RCA shareholders sued alleging the proxy statement was false and misleading under the federal securities laws. However, the statements complained of were not false or misleading and the alleged omissions were addressed by narrowly tailored warning language. Therefore, we affirm the district court's dismissal of the claims.

I.

RCA and AFIN's merger stems from their relationship with a business known as AR Global Investments LLC ("AR Global").¹ AR Global, directly and through entities it owns, creates and sells ownership interests in real estate investment trusts, which are sometimes referred to as REITs.² AR Global's affiliates then manage the day-to-day operations of those REITs including the purchase, sale and rental of real estate assets. This business model has historically produced substantial fee revenue for AR Global.

Consistent with its business model, AR Global, through an affiliated company, created RCA and AFIN and sold ownership interests in them. In addition, one of AR Global's affiliates managed their day-to-day operations.

In 2014 and 2015, financial improprieties regarding several companies affiliated with AR Global became public. As a result, a number of the REITs with whom AR Global had management contracts terminated AR Global as their asset manager. Fearing the loss of management fee revenue from additional terminations, AR Global developed a plan to prevent other REITs from terminating their contracts. To effectuate this plan, AR Global attempted to merge REITs with freely terminable management agreements into REITs with longer management agreements that were more difficult, if not virtually impossible, to break.

AFIN had a management contract with AR Global that was difficult to terminate because it had a twenty-year term. By contrast, RCA had a management contract that could be easily terminated because it only required sixty days' written notice and could be terminated without cause. Consistent with its plan, AR Global sought to merge RCA into AFIN to prevent RCA from terminating AR Global as its asset manager, thereby protecting future management fee revenues.

In response to the efforts of AR Global, in early 2016, AFIN and RCA began merger negotiations. On September 7, 2016, RCA announced a merger agreement between the two REITs. Under the terms of the agreement, RCA was to merge into AFIN so that AFIN would be the surviving entity after the merger. In other words, the RCA shareholders would become AFIN shareholders. The merger agreement provided that the RCA shareholders would receive a combination of cash and AFIN stock, estimated to be $10.26, in exchange for each of their RCA shares.

The merger had to be approved by RCA's shareholders. To solicit the shareholders' vote on the merger, on or about December 16, 2016, RCA's directors disseminated a proxy statement (the "Proxy") to the RCA shareholders. Like the merger agreement, the Proxy estimated that the RCA shareholders would receive $10.26 per RCA share from the merger.

An estimate, by its very nature, is not certain. To know the actual—rather than estimated—value the RCA shareholders would receive for their RCA shares, the current per share net asset value ("NAV") of AFIN stock would have been needed. However, AFIN's most recent calculation of its NAV was effective as of December 31, 2015. As of that date, the value of AFIN's NAV was $24.17. Even though it was almost a year old at the time, AFIN's $24.17 NAV, effective as of December 31, 2015, was used to arrive at the $10.26 per share estimate of the value to be received by the RCA shareholders.

Of course, changes in AFIN's NAV after December 31, 2015, would necessarily affect the actual value received by the RCA shareholders from the merger. If the NAV increased after December 31, 2015 due to improvements in AFIN's financial condition, the actual value to the RCA shareholders from the merger would be greater than the $10.26 per share estimate. On the other hand, if AFIN's fortunes worsened and the NAV decreased from its December 31, 2015 value, the actual per share value to the RCA shareholders from the merger would be less than $10.26.

In addition to the information about the value to be received by the RCA shareholders, the Proxy also contained information about AFIN and its financial condition, including projections of AFIN's future financial performance. These projections were referred to as Standalone Projections.

In February 2017, the RCA shareholders narrowly approved the merger by a 50.21% majority. Shortly after the merger, industry commentators began to question the financial benefit of the merger to the RCA shareholders. For example, an industry publication issued an article entitled "St. Valentine's Day Massacre" which described the damage the merger inflicted on the RCA shareholders.³

In the months following the merger, the RCA shareholders learned from several SEC filings from AFIN information about AFIN's financial condition the shareholders did not know before the merger. First, they learned of a $27.3 million loss to AFIN caused by SunTrust Bank's decision not to renew leases for forty-five bank branches. Second, they learned that AFIN's estimated NAV as of December 31, 2016, was $23.37 per share, down from the $24.17 per share value referenced in the merger agreement and the Proxy. Third, they learned AFIN's real estate rental income (excluding income on properties previously owned by RCA and acquired in the merger) had decreased by 3.7% from the same quarter the year before. Fourth, they learned AFIN was reducing its annual dividend distribution by more than 20%. Fifth, the RCA shareholders learned of AFIN's January 31, 2017 sale of its Merrill Lynch properties at a higher capitalization rate than the capitalization rate used to calculate the December 31, 2015 NAV and thus at a price that might lower AFIN's NAV.

Believing this information was known at the time of the merger and should have been disclosed in the Proxy, eight named plaintiffs brought this putative class action on behalf of the former RCA shareholders (the "RCA Shareholders"). They alleged RCA, along with its directors Leslie D. Michelson and Edward G. Rendell and AR Global's CEO Edward M. Weil, Jr. ("Defendants")⁴ , violated Section 14(a) of the Securities Exchange Act and Securities and Exchange Commission ("SEC") Rule 14a-9 by disseminating a false and misleading proxy statement to solicit approval of the merger between RCA and AFIN. Defendants moved to dismiss this claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The district court granted the motions related to this claim. The RCA Shareholders timely appealed, and we have jurisdiction of this appeal pursuant to 28 U.S.C. § 1291.

II.

This Court reviews an order granting a motion to dismiss de novo. Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc. , 591 F.3d 250, 253 (4th Cir. 2009). A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of the claims pled in a complaint. To sufficiently plead a claim, the Federal Rules of Civil Procedure require that "[a] pleading that states a claim for relief must contain ... a short and plain statement of the claim showing that the pleader is entitled to relief...." Fed. R. Civ. P. 8(a)(2).

To meet the Rule 8 standard and survive a motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). To contain...